Legislature Approves Tax Cut for Oil Companies

After years of fighting for it, Gov. Sean Parnell has gotten his major legislative priority through: a reduction of the state’s oil tax rate.

Just hours before the legislature was scheduled to gavel out on Sunday, the Senate took a final vote on a bill that essentially scraps the current tax regime, known as ACES. They voted 12 to 8 to accept a version that the House passed early that morning. It was the bill’s final political hurdle.

“It’s a step forward in doing what’s right for our kids and the next generation,” said Sen. Anna Fairclough, an Eagle River Republican who carried the bill. She argued that the tax cut would encourage more investment and more oil production in the state.

While the majority voted for concurrence, Fairclough was one of just two senate who spoke in favor of the oil tax change on Sunday. The votes had already been counted, so the floor session gave those against the bill a chance to offer their swan songs for the present tax structure.

“I’m very concerned that this bill will bankrupt the state,” said Sen. Hollis French, an Anchorage Democrat. “I know in my heart this will lead to an income tax. I know in my heart this will lead to the loss of our permanent fund dividend, okay? I know for a fact that’s beyond contention that this will lead to greater profits for the oil industry.”

A number of the opponents used fiscal responsibility as a reason for fighting the bill. The bill creates a tax ceiling of 35 percent, which is offset by a per barrel credit that shrinks as the price of oil goes up. At forecasted prices and rates of production, the Department of Revenue expects the bill to lower taxes by at least $3.5 billion over the next five years.

Some legislators suggested that the price tag would be even greater. Sen. Lyman Hoffman, a Bethel Democrat, cited the numbers from the state’s Legislative Finance Division showing that the state will need to borrow $1.6 billion from savings this year with the tax change. Sen. Bert Stedman, a Sitka Republican, pointed to an analysis determining that the state would have lost $2 billion if the new tax rules were applied to last year’s production.

Bill opponents also rebutted arguments that oil production would go up if Alaska competed with states with lower tax rates, like North Dakota and Texas. They said that Alaska’s production decline began well before ACES was implemented. They held that it was technology, not taxes, that was causing the boom in shale-rich states. And they characterized anecdotes that oil industry workers were leaving Alaska as misleading.

Anchorage Democrat Bill Wielechowski noted that the number of energy industry jobs was at an all-time high, according to the Department of Labor.

“Companies are not fleeing Alaska. Jobs are not fleeing Alaska. Investment’s not fleeing Alaska,” said Wielechowski. “Those facts are provably wrong.”

In response, Fairclough described those figures as inflated. She argued that Alaska has a distorted view of the North Slope economy because companies can earn tax credits through capital expenditures. Those credits let them buy down the tax rate by putting more money into Alaskan oil fields. The bill that passed on Sunday removes them.

“The industry has figured out that the best thing they can do with their money is spend money, and it’ll reduce the tax rates that they pay on the North Slope,” said Fairclough. “ACES is broken.”

The bill ultimately passed with the support of eleven Republicans and Democrat Donny Olson, of Golovin. Coastal Republicans Bert Stedman and Gary Stevens joined a contingent of Democrats in voting no.

The oil tax overhaul is a major coup for Gov. Sean Parnell, who sponsored the bill and intends to sign it into law. Parnell has pushed for lower taxes throughout his administration, but was blocked by a bipartisan coalition in the Senate. That coalition fell apart last year, after a number of members lost their seats in the wake of redistricting. In a statement, Parnell described the legislation as “fair to Alaskans.”

“[I]t encourages new production, it is simple and restores balance to the system, and the tax structure is competitive and durable. Alaska’s oil comeback starts now.”

The new law goes into effect in 2014. A referendum is already in the works.